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Edited version of private advice
Authorisation Number: 1052390429517
Date of advice: 06 May 2025
Ruling
Subject: Deductions
Question 1
Am I entitled to a deduction for interest incurred on money borrowed to pay income tax liabilities that arise from carrying on a business under section 8-1 of the Income Tax Assessment Act 1997?
Answer 1
Yes
This ruling applies for the following period:
Year ending 30 June 20XX
The scheme commenced on:
1 July 20XX
Relevant facts and circumstances
1. You are a medical practitioner.
2. You operate a medical practice as a sole trader with your own ABN.
3. Your income is not personal services income due to the results test.
4. You have made late and short payments of taxes and as a result you have a debt owing on your income tax account and integrated client account.
5. You have borrowed money from the Bank to pay your outstanding income tax liabilities and GIC.
6. You have incurred interest expenses on the money borrowed.
Relevant legislative provisions
Income Tax Assessment Act 1997 section 8-1
Income Tax Assessment Act 1997 section 25-5
Reasons for decision
Section 8-1 allows a deduction for all losses and outgoings to the extent to which they are incurred in gaining or producing assessable income or necessarily incurred in carrying on a business to gain or produce assessable income except where the outgoings are of a capital, private or domestic nature.
Subsection 25-5(1) allows a deduction for expenditure incurred in managing your tax affairs; however, paragraph 25-5(2)(c) specifically excludes a deduction under subsection 25-5(1) for expenses associated with borrowing money (including payments of interest) to pay a tax liability.
Taxation Ruling IT 2582 considers the deductibility of interest incurred on money borrowed by companies to pay income tax, and provides that where a taxpayer carries on a business for the purpose of gaining or producing assessable income and, in connection with the carrying on of that business, borrows money to pay income tax then it is considered that the interest incurred on those borrowings is a normal incident of conducting that business.
The same approach is applicable to an individual carrying on a business as a sole trader; however it does not apply to interest on borrowings that are not connected with the carrying on of a business for the purpose of producing assessable income.
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